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BDO Transfer Pricing News - March 2016

Mon, 03/14/2016 - 12:00am
This issue of BDO’s Transfer Pricing Newsletter focuses on recent developments in the field of transfer
pricing in Belgium, Brazil, Israel, Peru, Sri Lanka, Switzerland and Zimbabwe. As you will read, the ongoing work on OECD’s BEPS project, as well as the increasing importance of transfer pricing, is resulting in many changes around the world.
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Compensation & Benefits Alert - March 2016

Fri, 03/11/2016 - 12:00am
ACA Reporting (Forms 1095) Running Down to the Wire; Assistance Still Available to Meet March 31, 2016 Deadline  Download PDF Version
Summary Beginning this year, the Affordable Care Act (ACA) requires certain employers to report health coverage information to their employees and the IRS.  If you have already completed and mailed the 2015 Forms 1095 to employees, no further action is needed at this time.  If your Forms 1095 are still in process, most systems and vendors have an internal deadline that is earlier than the IRS’s March 31 deadline for providing copies to employees. In short, not much time remains to complete your reporting obligation to employees.1  
Details Triple Check If You Don’t Think the ACA Reporting Requirements Apply To Your Business

Employers with 50 or more full-time and full-time-equivalent employees in the 2014 calendar year are required to provide Form 1095-C to each employee who is considered full-time for any one month during 2015.    This determination is NOT made based solely on your entity’s employee count.  If your entity is connected to another entity through ownership you might be required to combine all employees when determining your requirement to prepare Forms 1095-C.  Subsidiaries with less than 50 employees that know little about other entities owned by the parent (especially foreign parents) are at particular risk for a filing requirement caused by the headcount of its brother-sister businesses.  

Even employers with fewer than 50 full-time and full-time equivalent employees that offer self-insured health benefits have a requirement to provide employees a Form 1095-B.   
Still Working...You're Not Alone While many employers are nearing completion of the forms,  some  are still in the early stages, i.e., identifying full time employees, extracting data from various systems, clarifying which codes apply  for Form 1095-C and locating a vendor that can produce the Forms.   
  Keep Going to Reduce Penalties Don’t give up on the process. There are penalties that apply for a failure to provide the Form 1095 as required. The IRS has indicated that it will be lenient on first year penalties, provided the employer made a good faith effort at compliance.   Missing the March deadline without making every effort to file as soon as possible could be considered an act of bad faith.  If the IRS does not think an employer acted in good faith, then it could apply a penalty of $250 for each IRS and payee copy not filed or furnished to the recipient, respectively.  The maximum penalty is $3 million for the IRS copies and $3 million for the recipient copies per calendar year.

Even if March 31 deadline is missed, continued diligence to prepare the Forms can avoid a failure to file the IRS copy before the applicable May or June due date and can significantly reduce the penalty of the late employee copy.  For failures that are corrected within 30 days after the filing due date, the $250 penalty is reduced to $50 per return and the maximum penalty of $3 million is reduced to $500,000 per calendar year. For failures corrected after 30 days but before August 1, the $250 penalty is reduced to $100 per return and the maximum penalty of $3 million is reduced to $1.5 million per calendar year.

Filers with gross receipts under $5 million are subject to the same per return penalty as outlined above but continue to get a break on the maximum annual penalty of $1 million per calendar year with reductions to $175,000  if  corrected within 30 days, and $500,000 if corrected after 30 days but before August 1.

On the other hand, taking no action could result in the penalty for intentionally failing to file of $1,000 per violation ($500 for each IRS and payee copy not filed or furnished to the recipient).
What To Do Re-evaluate your plan for compliance and be realistic. 
  • If the data gathering and code assignment is more than your in-house capabilities, request help from an outside source.
  • If your vendor has proven to be not capable, change vendors.
  • Deliver the Forms 1095 that you have completed to contain the penalty exposure to fewer undelivered Forms.  For instance, if the information on COBRA coverage is proving difficult to obtain or to combine with the information needed to file Forms 1095 for active employees, don’t delay the forms for the actives who are unaffected by COBRA benefits.   Deliver the forms that are ready and complete the COBRA information as soon as possible prior to the IRS filing deadline. 
1 The IRS copy of the Form 1095s must be transmitted with a Form 1094 no later than May 31, 2016 or June 30, 2016 if filed electronically.
 
For more information, please contact one of the following practice leaders:
 

Joan Vines
Sr. Director, National Tax - Compensation & Benefits

 

Penny Wagnon
Sr. Director, Compensation & Benefits

 

Linda Baker
Sr. Manager, Compensation & Benefits

 

Kim Flett
Sr. Director, Compensation & Benefits

  Don Hughes
Manager, Compensation & Benefits  

 

International Tax Alert - March 2016

Fri, 03/11/2016 - 12:00am
Brazil Update: Dutch Holding Companies No Longer Excluded From Gray List  Download PDF Version
Date/Timing Effective December 21, 2015, when Declaratory Act 3/2015 was published in Brazil’s official gazette.
Affecting Taxpayers that own Brazilian entities that have transactions with Dutch holding companies.
Details On June 4, 2010, the Brazilian tax authorities issued Normative Instruction 1,037/2010, which designated a number of regimes as Privileged Tax Regimes (also known as gray list jurisdictions).  On June 24, 2010, Normative Instruction 1,045/2010 amended the original list.

The gray list originally included Dutch holding companies that lacked substantial economic activities.  This inclusion was suspended by Declaratory Act 10/2010 issued on June 24, 2010.

Gray list entities are subject to stricter thin capitalization and transfer pricing rules, even when the parties to the transaction are unrelated.  For example, interest paid or credited by Brazilian entities to related or unrelated parties that reside in a gray list jurisdiction is subject to a 0.3:1 debt-to-equity ratio versus the standard ratio of 2:1.  If the debt to equity ratio is not met, interest paid is not deductible for income and social contribution tax purposes.  There are additional requirements to identify the effective beneficiary of a payment and proof of economic substance.

Transfer pricing rules also apply to all transactions between Brazilian entities and gray list entities, treating the entities as if they were related.

Payments to gray list entities are generally not subject to higher withholding tax rates, which apply to payments to black list tax havens or low tax jurisdictions.
Updates The Brazilian tax authorities have reversed the exclusion of Dutch holding companies that lack substantial economic activities from the gray list by issuing Declaratory Act 3/2015 which revokes Declaratory Act 10/2010.
BDO Insights BDO can help you get a more in depth understanding as to how this change affects your business, evaluate alternatives with a practical perspective, and assist with cross-border restructuring as needed. 
 
For more information, please contact one of the following practice leaders:
 

Robert Pedersen
Partner and International Tax Practice Leader

 

William F. Roth III
Partner

 

Bob Brown
Partner

 

Jerry Seade
Principal

  Scott Hendon
Partner  

Joe Calianno
Partner and International Technical
Tax Practice Leader

  Monika Loving
Partner  

Fabrizia Hadlow
Senior Manager

  Brad Rode
Partner   Chip Morgan
Partner

Unclaimed Property Alert - March 2016

Fri, 03/11/2016 - 12:00am
The Pennsylvania Treasury Department and Its Treasurer Sue the Delaware Escheator for Over $10 Million in Abandoned “Official Checks”
Download PDF Version
Summary On February 26, 2016, the Treasury Department of the Commonwealth of Pennsylvania and Mr. Timothy A. Reese, Commonwealth Treasurer, filed a complaint in the United States District Court for the Middle District of Pennsylvania in which MoneyGram Payment Systems, Inc., and Delaware State Escheator, Mr. David Gregor, are named as defendants.  The Pennsylvania Treasury Department and the Treasurer claim that MoneyGram erroneously submitted $10,293,869.50 to the Delaware Escheator in relation to abandoned “official checks” issued in Pennsylvania.  Pennsylvania seeks, among other relief, an award of damages of no less than the amount submitted to the Delaware Escheator, plus interest at 12% per annum, penalties of $1,000 per day, and attorneys’ fees and costs.
  Details Background

According to the complaint, MoneyGram is a Delaware formed corporation with its principal place of business in Texas.  During the period 2000 through 2009, MoneyGram issued “official checks” totaling $10,293,869.50, purchased at MoneyGram participating locations in Pennsylvania, which went uncashed for at least three years, and for which MoneyGram claims it does not have the last known address of the owners.  MoneyGram also issued money orders during the same period.  However, money orders are not at issue in the complaint.
 
Official checks are similar to money orders in that, in either case, the customer pays the value of the official check or money order, and a transaction fee.  In return, the customer receives an instrument that is pre-printed with the value of the customer’s remitted payment.  Like a money order, MoneyGram is directly liable for the pre-printed value of the instrument.  The only apparent differences between MoneyGram money orders and official checks are where they are sold, and the amounts that can be reflected on them.
 
The Pennsylvania Treasury Department retained an outside auditor to perform an audit of MoneyGram to determine if it had any abandoned property which should have been submitted to the Pennsylvania Treasury Department.  As a result of the audit, the Pennsylvania Treasury Department learned that MoneyGram remitted $10,293,869.50 to the Delaware Escheator, which represents the value paid for uncashed official checks issued in Pennsylvania during the period 2000 through 2009.
 
In mid-2015, the Pennsylvania Treasury Department notified representatives of the Delaware Escheator regarding sums payable on the official checks issued in Pennsylvania.  In 2016, after not receiving the desired response, the Pennsylvania Treasury Department demanded payment from the Delaware Escheator and MoneyGram of the sums remitted by MoneyGram for abandoned official checks purchased in Pennsylvania.  The Pennsylvania Treasury Department further demanded that MoneyGram immediately cease remitting sums payable on official checks purchased in Pennsylvania to the Delaware Escheator.  The Delaware Escheator refused the demand on grounds that the official checks are “third party bank checks,” and, thus, not subject to custody of the Pennsylvania Treasury Department.1  Caught in the middle, MoneyGram indicated that it would abide by a decision by Delaware and Pennsylvania, or by a court’s declaration, regarding which state is entitled to the sums payable on the official checks.  This lawsuit followed.
 
Other states, Colorado included, have made similar demands on Delaware for payment of sums payable on MoneyGram official checks that were purchased in states other than Delaware, but were remitted to the Delaware Escheator.
 
Relevant Federal and Pennsylvania Law
 
In Pennsylvania v. New York, 407 U.S. 206 (1972), the Supreme Court of the United States held that, similar to other property, the state of the holder’s corporate domicile (i.e., state of incorporation) had the right to escheat sums owed on an uncashed money order where the address of the owner is unknown.  However, the subsequently enacted 12 U.S.C. § 1250 provides that the state in which a “money order, traveler’s check, or similar written instrument (other than a third party bank check) on which a [corporation] is directly liable” was purchased is exclusively entitled to escheat of the sum payable on such an instrument.  Consistent with U.S. Supreme Court precedent and federal law, under Pennsylvania law, Pennsylvania has custody over intangible property where the address of the owner is unknown and the holder’s state of incorporation is Pennsylvania, and a money order issued in Pennsylvania for which the holder does not know the address of the holder is subject to the jurisdiction of Pennsylvania.  See 72 Pa. Stat. § 1301.2(a)(2).
 
The Pennsylvania Treasury Department’s and the Treasurer’s Requests for Relief
 
In its complaint, the Pennsylvania Treasury Department and the Treasurer request declaratory judgments on the following: (i) the official checks are money orders or similar written instruments, and not third party bank checks; (ii) the Delaware Escheator is in violation of 12 U.S.C. § 1250 because Pennsylvania is entitled to custody of the sums payable on the abandoned official checks issued in Pennsylvania; (iii) MoneyGram is in violation of 12 U.S.C. § 1250 and Pennsylvania unclaimed property law for the same reason; and (iv) all future sums payable on MoneyGram abandoned official checks purchased in Pennsylvania are payable to them.  In addition, the Pennsylvania Treasury Department and the Treasurer request an award of damages from the Delaware Escheator and MoneyGram of no less than $10,293,869.50, plus interest at 12% per annum, penalties of $1,000 per day, and attorneys’ fees and costs because, under applicable federal and Pennsylvania law, MoneyGram should have remitted the sum payable on the official checks to them, and the Delaware Escheator is in custody of funds which should have been paid to them as well.
  BDO Insights
  • Pennsylvania is actively pursuing unclaimed property through audits similar to the one MoneyGram underwent.  This case further illustrates Pennsylvania’s desire to collect (and Delaware’s desire to retain) money through enforcement of unclaimed property law.
  • If the ultimate outcome of this matter results in a decision favorable to Pennsylvania, the result could empower Pennsylvania and other states to pursue other companies that issue money orders or other similar instruments like MoneyGram for unclaimed property.  In addition, the Delaware Escheator, and Delaware’s coffers, would be vulnerable to additional claims made by Pennsylvania and other states with respect to the custody of money orders or other similar instruments.  This, in turn, could cause the Delaware Escheator to escalate its historically aggressive unclaimed property audit program. 

BDO’s National Unclaimed Property Practice has successfully assisted many clients in Pennsylvania and Delaware voluntary disclosures and unclaimed property audits, and can assist you.  Should you have any questions or would like to discuss escheatment, please contact Joseph Carr, Partner & National Unclaimed Property Practice Leader at (312) 616-3946 or jcarr@bdo.com.

1 Presumably, the Delaware Escheator is claiming that, as third party bank checks, it has custody over the abandoned official checks under the second priority rule in Texas v. New Jersey, 379 U.S. 674 (1965), which provides that if the records of a debtor do not show the state of the creditor’s last known address, the property is subject to escheat by the debtor’s state of incorporation.
 

Federal Tax Alert - March 2016

Wed, 03/09/2016 - 12:00am
Managing and Preventing Tax-Related Identity Theft
Download PDF Version
Summary Tax-related identity theft is rapidly increasing. Indeed, in February 2016, IRS identified at the top of its 2016 “dirty dozen” list of tax scams “identity theft,” “phone scams,” and “phishing” and reminds taxpayers of the need to guard against such scams and to protect personal information. (IRS Wraps Up the “Dirty Dozen” List of Tax Scams for 2016, IR-2016-29, February 19, 2016.)
Details What is tax-related identity theft?
Tax-related identity theft comes in several forms. “Identity theft,” as the IRS indicates, generally involves someone stealing an individual’s social security (or tax identification) number in order to file a fraudulent return claiming a fraudulent refund. Taxpayers typically discover the identity theft when attempting to e-file a tax return only to learn that a tax return has already been filed using the taxpayer’s social security number. One may also learn of identity theft by receiving a letter from IRS indicating that the IRS has identified a suspicious return using the taxpayer’s social security number. In many cases, the fraudulent filer claims a refund in an amount less than the payments or credits on the account, which is a flag to the IRS.

“Phone scams,” according to the IRS, involve bogus phone calls from those attempting to extract undue payments from taxpayers. Victims are often threatened with arrest, deportation, and license revocation.

“Phishing” involves phony e-mails regarding fake and often unexpected tax balances due or refunds; often these include links to sham websites seeking personal information. As the IRS notes, the agency “will never send taxpayers an email about a bill or refund out of the blue.”
  Think You're a Victim of Identity Theft? Take Action. PROBLEM: You attempted to e-file a return but it was rejected because another one has already been filed.
WHAT TO DO: A paper return should be filed and should include Form 14039, Identity Theft Affidavit. In the case of a joint return, one Form 14039 for each spouse and a copy of identification for each spouse should be included. If the e-filed return was attempted on or near the due date, the paper return should be sent within the five-day cure period (IRS Publication 4164). As always, a traceable delivery service (e.g., U.S. certified mail, UPS, or Federal Express) should be used. Thereafter, the IRS’s identity theft line should be contacted at 800-908-4490 (8:00 a.m. to 8:00 p.m. local time).
 
PROBLEM: You received a notice from the IRS indicating a potentially fraudulent return was attempted to be filed on your account.
WHAT TO DO: Respond immediately by calling the number provided in the letter.
Important: The IRS will generally contact taxpayers only by mail. The relevant IRS letters/notices in cases concerning tax-related identity theft include: 
  • a 5071C letter (telling a taxpayer that the IRS received a tax return with his/her name and/or social security number and needs to verify identity),
  • 4883C letter (informing a taxpayer that IRS needs more information to verify identity in order to process the tax return accurately),
  • 12C letter (advising that IRS has received the tax return; however, additional information is needed in order to process the return),
  • and 4310C letter (IRS Identified ID Theft Post-Adjustment Letter). 

What More Can You Do?
  • Request an Identity Protection Personal Identification Number (IP PIN). Request an IP PIN from the IRS. This is a six-digit number assigned to eligible taxpayers that helps prevent the misuse of one’s Social Security number on fraudulent federal income tax returns). Upon request, the IRS will issue a CP01A Notice with the IP PIN. Important: Currently, IP PINs are available to any victim of tax-related identification theft and any resident taxpayers of Florida, Georgia or the District of Columbia (the three jurisdictions with the highest per-capita incidents of identity theft). IP PINs are currently issued only in January, and each IP PIN user receives a different IP PIN each January. IP PIN correspondence must be retained; they are difficult to have reissued. More information on IP PINs.
  • Request a copy of the fraudulent tax return. A victim of identity theft, or an authorized individual, may request a redacted version of a fraudulent return that was filed and accepted by the IRS using your name and SSN. Read more on how to get your copy here.
  • Contact law enforcement. File a police report with your local law enforcement office.
  • Report it to the Federal Trade Commission (FTC). File a report online or by calling 877-ID-THEFT.
  • File an IRS Impersonation Scam Report with the Treasury Inspector General for Tax Administration. Fill out the online form or call 800-366-4484.
  • Read and bookmark the following IRS materials:
  • Activate a fraud alert and/or a credit freeze. Contact the three credit bureaus and activate a fraud alert and/or a credit freeze. A fraud alert requires lenders to take extra precautions in verifying your identity before granting credit in your name. A credit freeze prevents lenders from seeing your credit report unless you specifically grant them access. To activate either one, or both, contact:
    • Equifax: online or by phone 800-766-0008
    • Experian: online or by phone 888-397-3742
    • TransUnion: online or by phone 800-680-7289
  • Be patient. The IRS has made great strides in identifying tax-related identity theft cases and in taking early measures to assist in prevention; however, the entire process in resolving a taxpayer’s account will take time. Remember also that the IRS will likely freeze any expected refund while it completes such resolution.

BDO Insights General Tips For Preventing Identity Theft
  • Minimize personal information in purses or wallets; consider an RFID blocking wallet; retain copies of such information
  • Shred any documents with personal information
  • Avoid giving personal information by telephone
  • Protect computers with firewalls, antivirus protection, and security patches
  • Refrain from opening or clicking links to unsolicited e-mail
  • Monitor accounts and review financial statements frequently
  • Check that mail has not arrived previously opened
  • Review credit reports frequently
  • Consider an identity theft protection service

For questions related to matters discussed above, please contact Todd Simmens, Cathy Stopyra or Allison Goodhartz.

BDO Transfer Pricing Alert - March 2016

Wed, 03/09/2016 - 12:00am
Proposed Regulations introduced to address Country-by-Country (“CbC”) reporting (REG 109822-15) for certain United States taxpayers
Download PDF Version
Summary On December 21, 2015, the Treasury Department (the “Treasury”) and Internal Revenue Service (the “Service”) introduced Proposed Regulations Section 1.6038-4, on Country-by-Country (“CbC”) reporting (REG 109822-15) for certain United States taxpayers.  The Treasury and Service officials maintain that collecting information mandated under the proposed regulations will provide the Service with greater transparency regarding the operations and tax positions taken by United States multinational groups, which, in turn, will enable the Service to better enforce United States tax laws. 

Details Under the proposed regulations, the ultimate parent entity of a United States multinational group with at least $850 million in annual revenue in the preceding annual accounting period must file a yet-to-be-named CbC reporting form with the Service. The United States CbC reporting form follows the model template developed by the Organisation for Economic Co-operation and Development (“OECD”) under Action Item 13: Transfer Pricing Documentation and Country-by-Country Reporting of its Base Erosion and Profit Shifting (“BEPS”) initiative. By following the model template, the Service aims to minimize compliance costs. The IRS recognizes that an agreed upon international standard of information reporting will: (1) promote consistency of reporting obligations across tax jurisdictions and (2) reduce the risk that other countries will depart from this standard by imposing inconsistent or overlapping reporting obligations on United States multinationals. The proposed regulations call for the CbC reporting form to be filed no later than eight and a half months after the ultimate parent entity’s fiscal year end. 

The filing of this reporting form is novel in that United States multinationals are now required to share extensive information when they file their tax return.  On the reporting form, the United States parent entity must disclose extensive information about each constituent entity or country of operation, including: 
  • intercompany and third party revenue; 
  • profit (or loss) before income tax; 
  • stated capital; accumulated earnings;
  • net book value of tangible assets other than cash or cash equivalents; 
  • cash taxes paid;
  • income taxes accrued;
  • number of employees on a full-time equivalent basis; and 
  • indicators of economic activity within the group.  
The Treasury and Service have determined that this information will assist in better enforcement of the federal income tax laws by providing the Service with greater transparency regarding the operations and tax positions taken by United States multinationals.  It must be noted that information collected under the CbC reporting form does not qualify as a substitute for a full transfer pricing analysis under the Section 482 regulations, or form the sole basis for taxable income adjustments.  The CbC reporting form can, however, be used as a basis for further inquiry into a multinational group’s transfer pricing practices, which may lead to adjustments. 

Given the extensive new data reporting requirements, multinational groups have voiced concerns regarding the use and potential misuse of this information, either through the Service’s audit mechanism or through exchange of information procedures with foreign governments.  To address these concerns, the proposed regulations outline a number of confidentiality safeguards.  First, the United States CbC reporting form is limited to information that is presented on a multinational group’s tax return.  Second, the Service is permitted to exchange this information with a competent authority in a tax jurisdiction only if an information exchange agreement is in place between the two countries.   Prior to entering an information exchange agreement, the Treasury and Service are responsible for reviewing the relevant tax jurisdiction’s legal framework for maintaining confidential taxpayer information.  The review includes ensuring that necessary buffers are in place to protect exchange information, that protections are enforced, and that adequate penalties apply to any breach of confidentiality.  If a tax jurisdiction fails to comply with the confidentiality requirements, the United States competent authority can pause automatic exchange of the CbC reporting form until confidentiality obligations are met.

The Treasury and the Service have requested comments on certain aspects of the proposal before March 22, 2016.  If the proposed regulations are finalized this year, a United States multinational with a calendar year end must file its first CbC reporting form with its timely filed tax return, for the taxable year beginning on January 1, 2017.  

BDO Insights Since the OECD released Action Item 13 on October 5, 2015, a number of countries (e.g., Spain) have moved forward with implementing CbC reporting requirements, while several other countries, in addition to the United States, are in the implementation process.  With CbC reporting already underway in several countries, many United States multinationals are potentially subject to filing local CbC reports in these foreign jurisdictions prior to the finalization of the United States Treasury Regulations.  Thus, United States multinationals that fall under the scope of the proposed regulations should begin assessing their internal data gathering and retrieval processes, analyzing resources, and developing internal procedures in anticipation of the implementation of United States and foreign CbC reporting requirements.
 
For more information, please contact one of the following practice leaders:
 

Robert Pedersen
International Tax Practice Leader

 

William F. Roth III
Partner

 

Bob Brown
Partner

 

Jerry Seade
Principal

  Scott Hendon
Partner  

Joe Calianno
Partner and International Technical
Tax Practice Leader

  Monika Loving
Partner  

Michiko Hamada
Senior Director, Transfer Pricing

 
Brad Rode
Partner  
Chip Morgan
Partner
Kirk Hesser
Senior Director, Transfer Pricing  
Veena Parrikar
Prinicipal, Transfer Pricing

Expatriate Tax Newsletter - March 2016

Tue, 03/08/2016 - 12:00am
BDO's Expatriate Newsletter covers timely tax-related updates and regulations from countries around the globe. The March 2016  issue highlights developments in Argentina, Belgium, Malta and more. Topics include:
  • 2016 GLOBAL MOBILITY SURVEY: Participate and share your opinion! BDO is co-sponsoring the Global Mobility Survey, recognized as the largest and most robust study of global mobility themes and trends. To take the survey, follow the link in the newsletter.
  • The outlook of Argentina and impact of the country's new government (as of December 2015)

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State and Local Tax Alert - March 2016

Wed, 03/02/2016 - 12:00am
BDO Announces its Membership in the Online Incentives Exchange - An online Marketplace for trading federal and state tax credits


Download PDF Version


Summary BDO is now a member of the Online Incentives Exchange (“OIX”) – an online marketplace for buying, selling, and processing transferrable federal and state tax credits.  Through its OIX membership, BDO is better able to match buyers and sellers of tax credits, streamline the transfer process, and minimize pricing uncertainty.
  Details Federal and state governments offer tax credits to stimulate economic activity in a particular location or industry.  Some of these tax credits may be sold by a taxpayer that may not be able to fully utilize them to another taxpayer who can.  The transfer of tax credits often results in a win-win situation for both parties in a transfer transaction.  This is because the seller is able to monetize tax credits it may not otherwise be able to use, and the buyer is able to purchase these credits at a discount and then take a dollar-for-dollar credit against a tax liability.
 
Oftentimes, however, matching buyers and sellers of tax credits is difficult, the transfer process time-consuming, and determining the best price at which to buy or sell tax credits is unclear.  Through its membership in the OIX, BDO has access to: (i) a secure, cloud-based online marketplace for buying, selling, and processing transferrable tax credits; (ii) real-time market data and analytics; and (iii) detailed information and diligence on individual credits.  This allows BDO to better match buyers and sellers of tax credits, streamline the transfer process, and minimize the pricing uncertainty that is often associated with the transfer of tax credits.
BDO Insights
  • In connection with the purchase or sale of tax credits, BDO can assist buyers to identify current and future tax liabilities in jurisdictions where credits can be transferred and utilized, as well as consult on the risks and benefits of purchasing tax credits.  BDO can assist sellers with the evaluation of credits currently available for use, and identify which credits are transferrable.  For buyers and sellers, BDO can help identify possible tax structuring or compliance opportunities that may reduce current or future tax liabilities in order to maximize the use of tax credits.
  • BDO has substantial experience assisting clients with federal and state tax credit transfers. Should you have any questions, or if you would like to discuss the sale or purchase of federal or state tax credits, please contact Tanya Erbe, National Credits and Incentives Leader, or Janet Bernier, Tax Principal.
 

For more information, please contact one of the following regional practice leaders:
 

West:   Atlantic: Rocky Cummings
Tax Partner
    Jeremy Migliara
Tax Senior Director
  Paul McGovern
Tax Senior Director   Jonathan Liss
Tax Senior Director   Northeast:   Central: Janet Bernier 
Tax Partner
    Angela Acosta
Tax Senior Director
  Matthew Dyment
Tax Principal
    Nick Boegel
Tax Senior Director
 
Southeast:   Joe Carr
Tax Principal
  Ashley Morris
Tax Senior Director
    Mariano Sori
Tax Partner
  Scott Smith
Tax Senior Director   Richard Spengler
Tax Senior Director       Southwest:     Gene Heatly
Tax Senior Director
      Tom Smith
Tax Partner

China Tax Newsletter – March 2016

Wed, 03/02/2016 - 12:00am
The latest edition of BDO China's China Tax Newsletter features recent tax-related news and developments in China, including the following topics and issues: 
  • The Scope of Exemption of Governmental Funds 
  • Amendments to Certain Tax Returns of the Set of Annual Enterprise Income Tax ("EIT") Returns 
  • Extension of Tax Incentive Policy on Public Rental Housing     
 
Download

2016 BDO Tax Outlook Survey

Wed, 03/02/2016 - 12:00am
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Tax Reform Takes Center Stage in 2016 The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) may be the last significant tax bill of the Obama administration. With the 2016 presidential election looming, tax directors are closely watching how America’s choice will impact the tax reform landform landscape—and by proxy, their financial reporting and tax planning strategies. 

Eight months before the 2016 presidential election, the tax reform debate has reached a boiling point, with candidates from both parties proposing significant changes to federal tax policy. But according to a recent ABC News / Washington Post Poll, just 6 percent of voters who lean Republican and 4 percent of those who lean Democrat rank  taxes as the most important issue impacting their vote.

The same cannot be said of tax directors, for whom changes to the tax code can mean significant profit lost or gained and impact financing and investment decisions for their organizations. With the election outcome unclear, one in five public company tax directors say planning for reform under the next president is their primary tax concern at this time, according to the second annual BDO USA, LLP Tax Outlook Survey. 

When asked if the outcome of the presidential election will or will not result in significant tax code changes, 77 percent of public company tax directors indicated they believe tax reform will pass if the next president is a Republican. Thirty-three percent believe tax reform will pass if the next president is a Democrat.

Topping tax directors’ reform wish list is reducing the corporate tax rate (41 percent), which at a top federal marginal rate of 35 percent, is among the highest in the industrialized world. Other tax reform proposals they would most like to see include a shift to a territorial tax system (20 percent) and a simplified tax code (19 percent). Just 2 percent cite lowering the tax burden on capital gains as a high priority.





“The real challenge for businesses in an election year is planning for uncertainty. The recent vacancy on the Supreme Court has only heightened the partisan divide; however, the compromise to make permanent a number of important tax extenders reached at the end of last year may portend additional opportunities to find common ground.” Matthew Becker, partner in the national Tax practice at BDO
  Spotlight on The PATH Act  The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) was signed into law on December 18, along with a FY 2016 omnibus. The Act does considerably more than the typical tax extenders legislation seen in prior years, which many taxpayers had criticized as being too short-lived to rely on for meaningful strategic planning. It makes permanent over 20 key tax provisions, including the research tax credit, enhanced Code Sec. 179 expensing and the American Opportunity Tax Credit. It also extends some provisions, including bonus depreciation for five years and many others for two years. In addition, many extenders have been enhanced, and the Act imposes a two-year moratorium on the ACA medical device excise tax. 

The PATH Act is the first significant tax legislation passed since the American Tax Relief Act of 2012, and may be the last major tax bill of the Obama administration. The tax measures in the Act are expansive and are expected to help nearly all individuals and businesses across all sectors of the economy.

  International Tax Planning in the Post-BEPS Era Major tax reform efforts on the international stage are also a source of anxiety for tax directors as they look to optimize global growth, with 55 percent saying they plan to enter or expand international markets in 2016. 

On Monday, October 5, 2015, the Organisation for Economic Co-operation and Development (OECD) issued its long-awaited final recommendations to address tax base erosion and profit shifting (BEPS) by multi-national enterprises. First introduced in July 2013, the 15-point action plan is designed to shape “fair, effective and efficient tax systems” and address issues arising from tax planning strategies that exploit gaps or mismatches in member countries’ tax rules.

Now that the OECD has finalized the BEPS initiative, tax directors will need to prepare their organizations to meet new global tax rules and requirements. Nearly half (48 percent) of respondents say international tax planning, including BEPS, is their biggest tax issue for 2016. Of the 15 items listed in the BEPS Action Plan, the recommendations on transfer pricing (Action Items 8, 9, 10 and 13) pose the greatest concern, cited by 54 percent of survey participants. Transfer pricing is top of mind for good reason: 81 percent of tax directors say their organization’s current tax strategy includes transfer pricing mechanisms.

BEPS has reporting implications as early as this year, with country-by-country reporting rules taking effect for tax years starting on or after January 1, 2016. These requirements are covered under Action 13, which addresses changes to transfer pricing documentation standards.  Most tax directors (87 percent) expect to have completed the country-by-country analysis by the December 31, 2017 deadline for the first report. 

While much of the BEPS agenda still awaits implementation, more than half (52 percent) of respondents are proactively taking steps based on the Action Item recommendations. Another third are waiting for individual countries to implement BEPS measures before taking any action.

"BEPS is one of the most ambitious reform initiatives ever undertaken on an international scale. Between the election in November and BEPS implementation in the U.S. and overseas, the tax regulatory and reporting environment is in a state of major flux. The BEPS recommendations may be applied differently by different countries, which is creating more uncertainty and confusion for multinational businesses. As we wait to see how implementation unfolds, businesses should closely monitor the adoption of BEPS to determine the potential tax consequences and review their internal compliance controls and procedures.” Paul Heiselmann, national managing partner of Specialized Tax Services at BDO
Spotlight on BEPS
An overview of the OECD’s 15-point BEPS Action Plan Action Item 1: Addressing the Tax Challenges of the Digital Economy
The “next step” recommendation in the report on Action Item 1 is to monitor closely the combined effect of all Action Items on the digital economy, via a “detailed mandate to be developed in 2016” and a digital economy report to be produced by 2020. 

Action Item 2: Neutralize the Effects of Hybrid Mismatch Arrangements 
Action Item 2 targets hybrid mismatch arrangements—arrangements that exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions to achieve double non-taxation, including long-term deferral.

Action Item 3: Designing Effective Controlled Foreign Company (CFC) Rules
Action Item 3 addresses the need for developing a global framework for CFC rules, which generally provide an anti-deferral mechanism within a taxation system to trigger current taxation of an item of income to prevent shifting income between jurisdictions.

Action Item 4: Limiting Base Erosion Involving Interest Deductions and Other Financial Payments 
Action Item 4 addresses the risk of BEPS through interest deductions, identifying three basic scenarios involving such risk. The OECD’s recommended approach to limit interest deductions is based on a fixed ratio rule.

Action Item 5: Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance 
Action Item 5 aims to “revamp the work on harmful tax practices with a priority on improving transparency, including compulsory spontaneous exchange on rulings relating to preferential regimes, and on requiring substantial activity for any preferential regime.”

Action Item 6: Prevent Treaty Abuse
Action Item 6 addresses the inappropriate use of tax treaty benefits and includes recommendations to counter treaty shopping arrangements.
 
Action Item 7: Preventing the Artificial Avoidance of Permanent Establishment Status
Action Item 7 includes changes to the definition of permanent establishment in Article 5 of the OECD Model Tax Convention to prevent commissionaire structures and similar strategies.

Action Items 8-10: Aligning Transfer Pricing Outcomes with Value Creation 
Action Items 8- 10 were released in a single report addressing transactions involving intangibles, risk and capital transfers between group entities, as well as other high-risk transactions. 
  • Action Item 8 recommends the adoption of a broad and clearly delineated definition of intangibles, which will ensure that profits associated with the transfer and use of intangible property are appropriately allocated in accordance with value creation.  
  • Action Item 9 outlines transfer pricing rules or special measures to ensure that an entity does not accrue inappropriate returns solely based on contractually assumed risk or the provision of capital. 
  • Action Item 10 recommends the adoption of transfer pricing rules or special measures to clarify the re-characterization of transactions and the application of transfer pricing methods with respect to global value chains, as well as to provide protection against common types of base eroding payments. 

Action Item 11: Monitoring and Measuring BEPS
Action 11 establishes methodologies to collect and analyze data on BEPS and the actions to address it, develops recommendations regarding indicators of the scale and economic impact of BEPS, and ensures that tools are available to monitor and evaluate the effectiveness and economic impact of the actions taken to address BEPS on an ongoing basis.

Action Item 12: Mandatory Disclosure Rules
Action Item 12 sets out recommendations for designing an effective disclosure regime to counter the BEPS concerns of each country. 

Action Item 13: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting
Action Item 13 contains recommendations for transfer pricing documentation, which relies on a three-tiered approach and a revised template for country-by-country reporting to enhance transparency.  

Action Item 14: Making Dispute Resolutions More Effective
Action Item 14 develops solutions to address obstacles that prevent countries from solving treaty-related disputes under mutual agreement procedures in an effective and timely manner, via a minimum standard and a number of best practices. It also includes arbitration as an option for willing countries.

Action Item 15: Developing a Multilateral Instrument to Modify Bilateral Tax Treaties
Action Item 15 provides for the development of a multilateral instrument designed to modify existing bilateral tax treaties in order to swiftly implement the tax treaty measures developed in the course of the BEPS project. The goal is to conclude work and open the multilateral instrument by December 31, 2016. 
The PATH Act Expands R&D Credit Eligibility The landmark Protecting Americans from Tax Hikes Act (PATH Act) passed in December 2015 has put a spotlight on the federal research and development (R&D) credit, which is available to taxpayers with specified increases in business-related qualified research expenditures and for increases in payments to universities and other qualified organizations for basic research. The Act permanently extends and modifies the credit to benefit smaller companies. Businesses with gross receipts less than $50 million can now claim the credit against their Alternative Minimum Tax, and startups with annual gross receipts of less than $5 million can take up to $250,000 in credit against their payroll taxes for up to five years.

According to BDO’s Tax Outlook Survey, 70 percent of respondents are taking advantage of both federal and state R&D credits; 30 percent are only claiming the federal credit. 

For those organizations not claiming R&D credits, 52 percent say they made the decision based on the assumption that they did not qualify. With the passage of the PATH Act, other reasons cited for not claiming the credits will no longer be relevant for the 2016 tax year, including the alternative minimum tax bar (22 percent), the planning challenges of the annual renewal process (13 percent) and the assumption that an organization is too small to benefit (13 percent).



“The PATH Act has finally brought the R&D credit’s 35-year roller-coaster history of expiration and eleventh-hour renewal to an end. Companies of all sizes can now reliably use the credit to offset tax liability and increase cash flow. Its new permanency and expanded availability helps the credit fulfill its original intent: to foster homegrown innovation.” Chris Bard, practice leader for Specialized Tax Services, Research and Development at BDO
Tax Directors Weigh State and Local Tax Considerations Looking beyond R&D incentives, tax directors are leveraging the following strategies to minimize their tax burden at the state and local level:
  • 89 percent claim income or franchise tax credits and exemptions
  • 89 percent claim sales tax refunds and exemptions
  • 82 percent claim property tax abatements and exemptions
  • 46 percent take advantage of training grants
  • 32 percent take advantage of financing programs 
Just under a fourth (24 percent) of tax directors expect their organization to enter a new geographic market in the United States in the next year. For those respondents anticipating domestic expansion, income or franchise tax credits and exemptions and property tax abatements and exemptions have equal weight in impacting their decision to enter new markets (50 percent each).

“Tax directors also have their eye on tax reform at the state and local level as tax law changes are enacted and new incentive programs come into play. Controversy over the taxation of the digital and service-based economy has been percolating over the last few years, and tax directors will be watching to see how states approach taxing borderless transactions.”Rocky Cummings, tax partner and head of National Multistate Tax Services at BDO
Financial Reporting and Tax Compliance Burden Looms Large Thirty-four percent of tax directors say avoiding material misstatements of income taxes is the most challenging aspect of financing reporting, followed by meeting deadlines for interim and annual income tax reporting (27 percent), recruiting and maintaining professionals responsible for financial reporting of income tax (25 percent), and staying up-to-date on accounting standards changes and proposals (15 percent).

These financial reporting concerns contribute to the ever-growing tax compliance burden. Sixty-three percent of tax directors say the cost of compliance within the tax and financial regulatory environment has increased in the last year.

No matter what the outcome of the November election, the coming years will likely bring change to tax legislation on a domestic and international level. Navigating this uncertain tax environment will require a careful balance of capitalizing on potential new opportunities and mitigating future risk.


 
For more information on BDO USA's service offerings, please contact one of the following regional practice leaders:
 

Matthew Becker
Grand Rapids

 

Chris Bard
Los Angeles

  Paul Heiselmann
Chicago   Robert Pedersen
New York   Todd Simmens 
Woodbridge   Joseph Calianno
Washington, D.C.  

Andrew Gibson 
Atlanta

 

Yosef Barbut
New York

 

Rocky Cummings
San Jose

 

Bob Haran
Boston


About the Survey The BDO Tax Outlook Survey of Tax Directors is a national telephone survey conducted by Market Measurement, Inc., an independent market research consulting firm, whose executive interviewers spoke directly to 150 tax directors, or those with tax director responsibilities, at public companies using a survey conducted within a scientifically developed, pure random sample.

BDO Knows: ASC 740 - March 2016

Wed, 03/02/2016 - 12:00am
Financial Reporting Treatment under ASC 740 of Income Tax Provisions in the PATH Act 
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Summary  On December 18, 2015, President Obama signed into law the Protecting Americans from Tax Hikes (PATH) Act of 2015 (the “Act”) and the Fiscal Year 2016 Budget (the “omnibus”). The Act contains provisions that retroactively restore and extend a large number of expired tax provisions, commonly known as “tax extenders”. These extenders, which had expired prior to 2015, have been retroactively restored effective January 1, 2015. While some provisions have been extended permanently, others have been extended only temporarily. The omnibus also contains several important income and excise tax provisions (e.g., certain excise taxes required under the Affordable Care Act have been delayed or temporarily suspended).   
  Details The Act restored and extended the following key provisions (non-inclusive):
  • The research credit under Code Section 41 for qualified research and development (“R&D credit”) is permanently extended;
  • The election under Code Section 179 to expense the cost of property placed in business is permanently extended with an expensing limit of $500,000 and an overall investment limit of $2,000,000 before phase out;
  • A 15-year straight-line depreciation under Code Section 168 is permanently extended for certain qualified leasehold improvements, restaurant property and retail improvements;
  • The exception under Code Section 953 from current U.S. tax of active financing foreign income is permanently extended (i.e., Subpart F exception for active financing income);
  • The exception under Code Section 954 from current U.S. tax of foreign intercompany income including dividends, royalties, interest, and rents is temporarily extended through 2019 (i.e., the Subpart F “look-through” exception); and
  • The additional first-year deprecation (i.e., bonus depreciation) under Code Section 168(k) is temporarily extended through 2019 under a phased-down schedule with a 50 percent bonus depreciation limit in years through 2017, 40 percent in 2018, and 30 percent in 2019.  
The Act has also created two new types of R&D credits: one for eligible small businesses and one for qualified small businesses. Eligible small businesses will be allowed to utilize the research credit even if they are subject to the Alternative Minimum Tax (AMT) and qualified small business will be allowed to utilize, for up to five years, the research credit against the employer portion of payroll tax (i.e., FICA tax) not exceeding $250,000 per year. These new research credits are available for credits generated in tax years beginning after 2015.    

Refer to this link for BDO’s Special Report issued December 23, 2015 for greater details on the Act’s and the 2016 Budget Bill’s many income tax and non-income tax provisions.

This Alert will highlight some of the Act’s more significant income tax accounting implications accounted for under ASC 740 Income Taxes.
Income tax accounting implications

Recognition Period of the Effects of Law Changes

Current and deferred taxes are determined based on provisions of tax laws that are presently enacted as of the balance sheet date. The effects of future changes in tax laws may not be considered until they are enacted. Therefore, the effects of changes in tax laws, including retroactive changes, are accounted for in the period in which the legislation is enacted using temporary differences and currently taxable income existing as of the enactment date. The Act is considered enacted on the date the president signed it into law, which is in the fourth quarter 2015 for calendar year reporting entities and in the period which includes the enactment date (i.e., December 18, 2015) for reporting entities with other fiscal years.

Upon reinstatement of expired tax provisions, current and deferred taxes are re-measured for financial reporting purposes in the reporting period that includes the enactment, and the cumulative effect, including any effect on valuation allowance, is included as a tax expense or benefit from continuing operations in the period of enactment.

Therefore, calendar-year public entities will recognize an adjustment in the fourth quarter results of their 2015 fiscal year. Public entities with other fiscal years will recognize an adjustment in interim periods that include the enactment date. For example, a public entity with a June 30 fiscal year will adjust the estimate of the annual effective tax rate from continuing operations in the second interim period to reflect the reinstatement of the R&D credit to the beginning of the fiscal year which ends on June 30, 2016. Additionally, it might also recognize a discrete period benefit (i.e., second interim period) to reflect the R&D credit for the first six months in 2015 which can be claimed on the tax return for the fiscal year ending June 30, 2015.


The Cumulative Adjustment from the PATH Act

The many provisions of the Act and the omnibus will have varying effects on reporting entities depending on the nature of their business and the significance of certain income tax provisions included therein. Generally, income tax benefits that reduce the effective tax rate include the R&D credit, the two exceptions to Subpart F income inclusion for active financing income and active intercompany income (assuming the reporting entity is reinvesting foreign earnings indefinitely), and several other income tax credits (e.g., energy credits including the production/investment tax credits for wind energy). Certain provisions, such as the election under Code Section 179 to expense the cost of property placed in service and the bonus depreciation election under Code Section168(k) will impact both current and deferred taxes, but would expect to be tax rate neutral.           


Accounting Treatment for New R&D Credit Rules

The Act also made two important changes to the R&D credit that would benefit certain small and/or startup businesses effective for tax years beginning in 2016.  


The Small Business R&D Credit Offset to AMT and Regular Tax

Eligible small businesses, defined as privately-held businesses having average gross receipts of $50 million or less for the three preceding tax years, may now use their R&D credit to offset their AMT and regular tax liability when they are subject to the AMT.[1] Prior to this change, businesses could only use the R&D credit to offset their regular tax liability, if their regular tax was higher than tentative minimum tax (TMT) (the AMT law is summarized below).

A taxpayer’s annual net income tax liability is the sum of regular income tax liability plus AMT (both regular tax and AMT are determined after any available foreign tax credits). The AMT paid is generally available as an AMT credit carryforward to offset future regular tax liability (AMT is effectively a prepayment of regular tax liability). Therefore, the AMT credit carryforward generally yields a deferred tax asset (DTA).[2] The recognition of a current expense for AMT and a deferred tax benefit for the AMT credit carryforward is tax rate neutral (current expense and deferred benefit offset each other), absent a valuation allowance.
The Alternative Minimum Tax  AMT is an alternative method of calculating a taxpayer’s tax liability and is designed to ensure that taxpayers do not avoid tax liability altogether through the use of deductions and credits. A taxpayer is subject to the AMT when the regular tax liability is less than the Tentative Minimum Tax (TMT). For corporations, TMT is 20% of a taxpayer’s Alternative Minimum Taxable Income (AMTI), calculated based upon certain tax preferences and adjustments to regular taxable income or loss (the corporation regular tax is 34% for regular taxable income of $10 million or less and 35% for taxable income exceeding $10 million).

If a taxpayer’s regular income tax liability is greater than TMT, AMT will be zero and the taxpayer will pay the regular income tax liability minus any allowable credits. However, if a taxpayer’s regular tax liability is less than TMT, the taxpayer will pay the sum of AMT plus the regular income tax liability, minus any allowable credits. Note that the TMT is determined after any available foreign tax credits (IRC Section 55(b)(1)(B)).

Generally, most general business credits including the R&D credit cannot be used to offset regular tax liability if the company is subject to AMT. However, certain “specified credits” that fall within the general business credit have a separate limitation, in which the TMT is deemed to be zero, which results in a taxpayer being allowed to utilize these credits to offset both the AMT and the regular tax even when the taxpayer is subject to the AMT.

Prior to the Act, the R&D Credit generated by eligible small businesses (as defined) was not a “specified credit” which means the utilization of R&D credit to offset regular tax was subject to an overall limitation for all general business credits. The Act makes the R&D credit (of an eligible small business) a “specified credit” under IRC section 38(c)(4)(A)(ii)(I), and therefore the R&D credit is now available to offset both AMT and the regular tax, even when the eligible small business  is subject to the AMT.

The determination of net income liability is summarized as follows:
  • Regular tax is calculated net of any available foreign tax credits.
  • TMT is calculated net of any available foreign tax credits (with certain differences in calculation of foreign tax credits than under regular tax).
  • AMT is the excess, if any, of TMT over regular tax.
  • A single overall limitation for all general business credits is determined and the allowable amount is subtracted from the regular tax (but not below TMT).
A separate limitation for “specified credits” is determined and the allowable amount is subtracted from the regular tax and the AMT.The overall limitation on utilizable general business credits is the following:

Excess of Net Income Tax Liability (regular + AMT) over the greater of (1) TMT or (2) 25% of regular tax exceeding $25,000. However, for “specified credits”, the TMT in the limitation is assumed to be zero. 

The following example illustrates the accounting, pre- and post-PATH, for the R&D credit, AMT expense and the AMT credit carryforwards for a calendar year reporting entity, assuming no valuation allowance.[3]


Facts:

Company X, a U.S. reporting entity, has pretax income of $600,000 in the current year and one fixed asset with a cost basis of $1,000,000 which will be depreciated on a 5-year straight line method for book and AMT purposes (annual book depreciation of $200,000). Company X elects to take accelerated (MACRS) depreciation for tax, which would result in additional $300,000 of tax depreciation for illustrative purposes (i.e., regular tax depreciation is $500,000 per year for illustrative purposes). Company X has qualified research activities and expenditures and has calculated an R&D credit for the current year of $90,000. Additionally, it has an R&D credit carryforward of $25,000. Included in pretax income is $100,000 of tax-exempt interest income from specified activity bonds.
 
The regular taxable income for the current year is $200,000 (pretax income of $600,000 less tax-exempt interest of $100,000 less accelerated tax depreciation adjustment of $300,000). Regular tax is $68,000 (taxable income of $200,000 multiplied by 34% federal rate). For AMT purposes, the accelerated depreciation is replaced with regular depreciation, and the tax-exempt interest is added back, resulting in AMT taxable income of $600,000 and TMT of $120,000 (AMTI of $600,000 times 20% which is the alternative minimum tax rate for corporations).  Consequently, the TMT of $120,000 exceeds the regular tax of $68,000 resulting in AMT of $52,000 (the difference between TMT of $120,000 and regular tax of $68,000).
 
Company X is assumed to be an eligible small business, as defined in the law, for illustration purposes.


No Valuation Allowance Scenario:

Based on all available positive and negative evidence, Company X concludes that the deferred tax assets are more likely than not realizable and a valuation allowance is not required.            
 
The journal entries (JE) below reflect Company X’s income tax accounting:
 
Debit: Current Tax Expense (Regular)                     $68,000
Credit: Income Tax Payable (Regular)                                     $68,000
(JE to recognize current regular tax expense)
 
Debit: Current Tax Expense (AMT)                           $52,000
Credit: Income Tax Payable (AMT)                                           $52,000
(JE to recognize current AMT tax expense)
 
Debit: AMT Credit DTA                                            $52,000
Credit: Deferred Tax Expense (AMT)                                      $52,000
(JE to recognize the AMT credit)
 
Debit: R&D Credit DTA                                                   $90,000
Credit: Deferred Tax Expense                                                    $90,000
(JE to recognize the R&D credit)
Debit: Deferred Tax Expense                                      $102,000
Credit: Deferred Tax Liability (DTL)                                           $102,000
(JE to recognize deferred tax at 34% for taxable temporary difference of $300,000 due to accelerated tax depreciation) 

Note: income tax payable is reduced when a tax payment is made.

As noted above, pre-PATH, Company X would not be able to utilize the R&D credit in the current year due to the overall limitation on utilizable general business credits when TMT is higher than regular tax (i.e., the credit cannot be used in a tax year in which Company X is subject to AMT). This is because the overall limitation is zero as illustrated for this example: Excess of net regular tax of $120,000 (regular tax of $68,000 plus AMT of $52,000) over the greater of (1) TMT of $120,000 or (2) $10,750 which is 25% times (regular tax of $68,000 less $25,000).[4] Under this scenario, the R&D credit carryforward would be available to offset future regular tax to the extent that Company X’s regular tax exceeds TMT.

Company X’s net tax expense is $80,000: pretax income of $600,000 less non-taxable interest income of $100,000 (or $500,000 multiplied by 34 percent), which is $170,000 of tax expense before the R&D credit benefit of $90,000 and a net tax expense of $80,000 (current tax expense of $120,000 offset by a deferred tax benefit of $40,000). Its effective tax rate for the year is approximately 13 percent (net tax expense of $80,000 divided by pretax income of $600,000).

The components of deferred taxes as of the end of the current year include a DTA of $52,000 for AMT credit carryforward, a DTA of $115,000 for the R&D credit carryforward ($25,000 from prior periods plus $90,000 from the current year), and a DTL of $102,000 for fixed asset basis difference (resulting in a net DTA of $65,000).

Company X’s Effective Tax Rate Reconciliation:
Tax at 34%                           $204,000 (pretax income of $600,000 times 34%)
Tax-exempt Interest      ($34,000) (tax rate benefit of 6%)
R&D Credit                          ($90,000) (tax rate benefit of 15%)
Effective Tax                      $80,000                 13% rate

As illustrated above, pre-PATH Act, an eligible small business corporation would incur a current cash outlay for the both regular tax and AMT. The offset to current tax expense is a deferred tax benefit for an AMT credit and an R&D credit carryforward that can be used in future years, when regular tax exceeds TMT, to offset regular tax (note: regular tax cannot be reduced below TMT). The AMT DTA is evaluated with all other DTAs for valuation allowance requirements.

Starting in 2016, under the PATH Act, Company X is able to use its R&D credits to offset both AMT and regular tax, even when its TMT is higher than regular tax, thereby preserving cash.

In this example, Company X would utilize $25,000 of the R&D credit carryforward and $90,000 of the R&D credit originated in the current year to offset the AMT expense of $52,000 and the regular tax expense of $68,000 up to the limitation amount. For this illustration, the R&D credit carryforward is assumed to have been generated after the Act’s effective date for “specified” R&D credit (i.e., tax years starting in 2016).[5]

The “specified credit” limitation using the numbers above and TMT is deemed to be zero is the following:
Excess of net income tax of $120,000 (regular tax of $68,000 plus AMT of $52,000) over the greater of (1) TMT of zero or (2) $10,750 which is 25% times (regular tax of $68,000 less $25,000).[6] The limitation is therefore $109,250.

Company X is able to offset $109,250 of AMT and regular tax with R&D credits. That is, AMT of $52,000 and the regular tax of $68,000 are offset to $10,750. The R&D credit carryforward is $5,750 (total R&D credit of $115,000 less R&D utilization of $109,250).

It should be noted that Company X is entitled to an AMT credit carryforward of $52,000.
Company X’s total tax expense is still $80,000 with an effective tax rate of approximately 13 percent. Total tax expense consists of a current tax expense of $10,750 and a deferred tax expense of $69,250 arising from four items: a deferred benefit of $5,750 for current year R&D credit, a deferred benefit of $52,000 for AMT credit, a deferred expense of $25,000 for current-year utilization of the prior-year R&D credit carryforward, and a deferred expense of $102,000 for the fixed asset difference. Note, utilizing R&D credits that originate and are utilized in the current year is tax rate neutral, as the benefit from the credit offsets a current tax expense (in this example, $84,250 of current year R&D credit offsets an equivalent amount of current tax expense).

The following journal entries would be made (note – reporting entities may have different JE systems and this example is only illustrative based on Company X’s journal entries system as presented in this example):

Debit: Current Tax Expense         $10,750
Credit: Income Tax Payable                                          $10,750
(JE to recognize current tax expense)
 
Debit: AMT Credit DTA                                         $52,000
Credit: Deferred Tax Expense (AMT)                                      $52,000
(JE to recognize the AMT credit)
 
Debit: R&D Credit DTA                                                   $5,750
Credit: Deferred Tax Expense                                                    $5,750
(JE to recognize current-year R&D credit carryforward)
Debit: Deferred Tax Expense                      $25,000
Credit: R&D Credit DTA                                                                  $25,000
(JE to recognize utilization of R&D credit carryforward)
 
Debit: Deferred Tax Expense                                      $102,000
Credit: Deferred Tax Liability (DTL)                                           $102,000
(JE to recognize deferred tax at 34% for taxable temporary difference of $300,000 due to accelerated tax depreciation)


Valuation Allowance Scenario: 

When an entity incurs the AMT while it also maintains a valuation allowance on deferred tax assets, the AMT expense increases the effective tax rate since the AMT credit is offset by a valuation allowance. The change made by the Act may have a favorable impact on the tax expense of eligible small businesses as the R&D credits are available to offset both the AMT and the regular tax, potentially eliminating the AMT expense as shown in the example above. Furthermore, when an eligible small business is expecting to incur AMT due to significant adjustments and preference items, the Act change might accelerate the utilization of R&D credits that would otherwise expire unused.


The Election to Treat R&D Credit as Payroll Tax Credit Available to Offset Payroll Tax

The Act also allows qualified small businesses to elect, pursuant to IRC sections 41(h)(1) and 3111(f)(1),  to apply a portion of their research credit (capped at $250,000 per year) as a payroll tax credit against their payroll tax liability (i.e., FICA tax), rather than income tax liability.[7]The payroll tax offset is an amount specified by the entity that cannot exceed the smallest of (1) $250,000, (2) the R&D credit determined for the current year, and (3) the business credit carryforward under IRC section 39 to the following year.[8] That is, the payroll tax offset is limited to the general business credit carryforward to the following year that would be available if the payroll tax offset were not available. Therefore, a payroll tax offset would be limited to the R&D credit after any offset of regular tax and AMT (said another way, a payroll tax offset would be available only when the R&D credit exceeds the pre-credit tax liability).

To qualify, an entity’s gross receipts for the taxable year must be less than $5 million, and the entity must not have had gross receipts for any taxable year before the five taxable year period ending with the taxable year. A qualified small business can be a corporation (including an S corporation) or a partnership that meets the gross receipts requirements in any year.[9] This election can only be made during a five-year period, and the election must be made on or before the due date (including extension) of originally filed returns. The payroll tax offset is made on Form 941.

The Act authorizes the Department of Treasury to issue regulations requiring recapture of R&D credits utilized as offset to payroll tax including the filing of amended returns when an adjustment to the payroll tax portion of the research credit is necessary.

This change is beneficial to startups and small businesses with no current income tax liability (due to losses) that also generate R&D credits that would otherwise be carried forward into future periods and which would require income tax liability. Assuming the requirements and limitations are met, a company can use its R&D credits to offset payroll tax expense recognized in operating income.

Qualified small business reporting entities would need to determine whether the R&D credit is an income tax benefit accounted for under ASC 740 or as an item of pretax income (i.e., reduction of payroll tax expense) accounted for under a different accounting standard in the Codification.[10]

The Master Glossary definition of “income tax” in ASC 740 states the following: “Domestic and foreign federal (national), state, and local (including franchise) taxes based on income.” In fact, Topic 740 does not apply to franchise tax based on capital or to certain withholding taxes for the benefit of the owners.[11] The standard also explains that when the reporting entity incurs an excise tax which is independent of taxable income – i.e., the tax is due on a specific transaction regardless of whether there is any taxable income for the period in which the transaction occurs, the tax is not an income tax and it should be recognized as an expense in pretax income.[12] The employer’s portion of FICA taxes (i.e., payroll tax) is based on the employees’ income and not the reporting entity’s income, making it clear that payroll tax is not an income tax.

However, ASC 740 does not specifically address the accounting for income tax credits that are also available, by election, to offset payroll tax (i.e., dual purpose tax credits). Generally, refundable tax credits (i.e., credits that can be refunded for cash) are not considered income tax credits, even when the reporting entity is currently paying income tax and can utilize the credit to offset income tax liability.[13]

This new qualified small business R&D credit is not refundable. However, a qualified small business with currently minimal or no regular and AMT income tax liability has an option to either use the credit to offset income tax liability during a 20-year R&D credit carryforward period, assuming the entity would owe income tax during the carryforward period, or use the credit to offset payroll tax (up to $250,000 per year for five years).
Therefore, the accounting question is how to consider the ability to utilize current year R&D credits (after reducing net income tax, if any) to reduce payroll taxes. Two approaches are considered in this alert, pending the issuance of clarifying regulations and emerging practice.

One approach is to account for the benefit consistent with the chosen annual election and management’s expectation concerning the manner in which a credit carryforward is expected to be monetized.[14] For example, if a qualified small business generates current-year R&D credit of $200,000 when its pre-credit tax is $130,000, the entity can elect to treat $70,000 as payroll tax credit available to offset payroll tax liability on Form 941 (assuming the entity has no general business credit carryforward). Under this approach, the entity would recognize $130,000 as income tax benefit (the offset to current-year income tax) and $70,000 as pretax income benefit (the offset to payroll tax). If the entity does not owe income tax in the current year, it can elect to utilize up to $200,000 of the current-year R&D credit as an offset to payroll tax. If payroll tax is less than $200,000, the entity would consider the manner in which it is expecting to monetize the R&D credit carryforward. If the R&D credit carryforward is expected to offset future income tax, it would be accounted for as income tax benefit and any DTA carryforwards amount would be evaluated for a valuation allowance. Note, that if the recognition requirements in Topic 740 are met, a deferred tax asset for an R&D credit carryforward must be recognized (under Topic 740) regardless of the income statement presentation of the benefit (i.e., pretax income or income tax benefit).[15]

Another approach is to treat the R&D credit generated during the five year period up to $1,250,000 as a non-income tax benefit (i.e., an item of pretax income).

There are unique considerations which might favor the first approach.

The election is only available during a five-year period and the law, as currently written, limits the optionality to the R&D credits that are not otherwise used to reduce net income tax expense. Recognition of the maximum credit amount (i.e., $1,250,000) in pretax income would potentially result in having to reclassify unused credits to income tax after the five year period (a qualified small business would need to report about $20.2 million in payroll expense to owe $1,250,000 of FICA payroll tax during the five year period). Further, R&D credit utilized on the income tax return to offset income tax liability would necessitate complex accounting to gross up income tax expense and reclassify the benefit into pretax income.     
How BDO Can Help BDO can assist clients with the evaluation of the significance of the accounting impact of the Act’s tax extenders including appropriate disclosures that should be included in financial statements. 

 


For more information, please contact one of the following regional practice leaders:

Yosef Barbut
Tax Partner   Kevin Andersen
National Tax Partner   Stephen Arber
Tax Senior Director
     
Additional Contributors:  Joe Russo Tax Partner   William Connolly
Tax Senior Director   Jim Freeser Tax Senior Director   Alicia Massi Tax Associate  


[1] This was previously only allowed once, temporarily in 2010
[2] ASC 740-10-30-10 and ASC 740-10-30-5(d)
[3] This example is for illustrative purposes only. Federal tax rate of 34% is used as taxable income is under $10,000,000. It is also assumed no state income tax applies, for simplicity. 
[4] The determination of the allowable credit, which is also illustrated in this example, is not straightforward and requires comparison of total tax liability (regular plus AMT) to a specified formula provided in the tax law and IRS Form 3800.
[5] Note: this new credit is effective for R&D credits generated in tax years beginning in 2016 and onward.  Therefore, any R&D credit carryforward from pre-2016 years cannot offset AMT and regular tax in any year the taxpayer is subject to the AMT (except for 2010, where the benefit was temporary).
[6] As shown in this limitation formula, the full amount of regular tax cannot be offset by R&D credit once regular tax exceeds $25,000.  
[7] Payroll tax includes two components: (1) social security tax of 6.2% and (2) Medicare or hospital insurance (HI) tax of 1.45%. Under this change, R&D credits would be allowed, by election, to be treated as payroll tax credits to offset the social security payroll tax component (but not the Medicare or HI or the employee portion of payroll tax that the employer is required to withhold).   
[8] There are many general business credits listed in IRC section 38, and the order of absorption is prescribed in IRC section 38(d) which follows the order in which the credits appear in IRC section 38(b) (the R&D credit coming fourth).
[9] Individuals carrying active trade or business may also qualify if they meet the gross receipts test and requirement.
[10] The Codification encompasses all of the U.S. Generally Accepted Accounting Principles (GAAP) standards including the ASC Topic 740 Income Taxes.
[11] ASC 740-10-15-4.
[12] ASC 740-10-55-75. 
[13] There is no authoritative guidance in the standard. However, refundable tax benefits have in recent years emerged in many permutations and countries (e.g., the French employment tax credit) and various interpretive guidance and practice have emerged to treat such benefits as non-income tax benefits. 
[14] By analogy to ASC 740-10-55-23 which explains that measurement of deferred income taxes are based on tax elections expected to be made in future years.
[15] ASC 740-10-55-35.

State and Local Tax Alert - March 2016

Tue, 03/01/2016 - 12:00am
United States Court of Appeals for the Tenth Circuit Upholds Colorado's Sales and Use Tax Customer Notice and Reporting Requirement on Remote Sellers
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Summary 

In Direct Marketing Ass’n v. Brohl, No. 12-1175 (filed Feb. 22, 2016), the United States Court of Appeals for the Tenth Circuit upheld Colorado’s sales and use tax customer notice and reporting requirement on remote sellers who are otherwise protected from a sales/use tax collection obligation on their sales to Colorado customers based on their lack of a physical presence in the state.  

Details

The Supreme Court of the United States in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), held that a state cannot impose a sales or use tax collection obligation on an out-of-state seller if that seller lacks a physical presence in the state.  Since then, states have resorted to a number of tactics to assert taxing jurisdiction over Internet, mail order, and other remote sellers.  For example, in 2010 Colorado enacted a law that imposes notice and reporting obligations on retailers that do not collect sales tax on their sales to Colorado customers.  Specifically, the law requires non-collecting retailers to: (1) send a notice to Colorado customers that their purchases may be subject to use tax, (2) send customers an annual purchase summary if their aggregate purchases exceed $500, and (3) provide a “customer information report to the Colorado Department of Revenue of customer names, addresses, and total amount of purchases.”  The Direct Marketing Association (“DMA”), an industry group of businesses and organizations that market and sell products via catalogs, advertisements, broadcast media, and the Internet, challenged the law as discriminatory against and imposing an undue burden on interstate commerce in violation of the Commerce Clause of the United States Constitution. 
 
Soon after the Colorado law was enacted, the DMA challenged it in federal district court.  The court granted summary judgment for the DMA in early 2012 and issued an injunction to permanently enjoin the Colorado Department of Revenue from enforcing the law on the grounds that it discriminated against and imposed an undue burden on interstate commerce.  After Colorado appealed to the U.S. Court of Appeals for the Tenth Circuit, the Tenth Circuit held that the federal district court decision violated the Tax Injunction Act, ch. 646, 62 Stat. 932 (1948) (codified as 28 U.S.C. § 1341) (“TIA”), a federal law that prohibits federal courts from hearing state tax cases intended to enjoin the assessment, levy, or collection of any state tax unless state law does not provide a plain, speedy, and efficient remedy.  Colorado then brought the case to the Supreme Court of the United States, which reversed the Tenth Circuit in Direct Marketing Ass’n v. Brohl, 575 U.S.      , 135 S.Ct. 1124 (2015) (Brohl I).  The Court held that the TIA did not bar federal courts from hearing a challenge to the Colorado law and remanded the case to the Tenth Circuit for further proceedings on the DMA’s Commerce Clause challenges. 
 
In Direct Marketing Ass’n v. Brohl, No. 12-1175 (Feb. 22, 2016) (Brohl II), the Tenth Circuit was persuaded by the U.S. Supreme Court’s decision in Brohl I with respect to the import of Quill.  According to the Court in Brohl I, the decision in Quill established the principle that a state “may not require retailers who lack a physical presence in the State to collect [sales and use] taxes on behalf of the [state].”  Based on the U.S. Supreme Court’s reasoning that the TIA was not implicated in Brohl I (i.e., the DMA’s federal court action was not filed to enjoin the assessment, levy, or collection of a state tax, only notice and reporting requirements), the Tenth Circuit reasoned that Quill applies narrowly and only requires that there be a physical presence before a company can be compelled to collect a tax.   As such, Quill is inapplicable when a company without a physical presence is subjected to procedural notice and reporting obligations.  The Tenth Circuit’s view of Quill is fundamental to that court of appeals’ rejection of the DMA’s Commerce Clause challenges with respect to the Colorado law.
 
A state tax law discriminates against interstate commerce in violation of the Commerce Clause if it facially discriminates against interstate commerce or if it has a discriminatory effect on interstate commerce.  The Tenth Circuit held the Colorado law did not facially discriminate against interstate commerce, because it did not distinguish between in-state and out-of-state economic interests.  Rather, any retailer was subject to the customer notice and reporting requirements if it did not collect Colorado sales and use taxes (e.g., “non-collecting retailers”).  According to the Tenth Circuit, the Colorado law’s application to any non-collecting retailer, and not specifically to out-of-state retailers without a Colorado physical presence, was key to the law withstanding the DMA’s facial discrimination challenge.  Some out-of-state retailers voluntarily collected Colorado sales and use taxes, while others did not.  The court of appeal reasoned that the law distinguished on the basis of whether a retailer (in-state or out-of-state) collected Colorado sales and use taxes, not on the basis of any geographical distinctions between retailers. 
 
Next, the Tenth Circuit held the Colorado law did not have a discriminatory effect on interstate commerce.  First, according to the court, in-state retailers did not gain a competitive advantage, because Colorado consumers had pre-existing obligations to pay sales or use taxes on their purchases from in-state or out-of-state retailers.  Second, the Tenth Circuit found that in-state and out-of-state retailers were not similarly situated because the out-of-state retailers without a physical presence in Colorado did not have to collect Colorado sales and use taxes, unlike their in-state competitors.  Third, the Tenth Circuit reasoned that Colorado’s customer notice and reporting requirements would have a discriminatory effect only if, in the broader context, they imposed different treatment on in-state and out-of-state retailers that benefited the former and burden the latter.  The court found that the Colorado customer notice and reporting requirements imposed on out-of-state, non-collecting retailers was no more burdensome than in-state retailers’ obligations to collect and remit sales and use taxes on their sales to Colorado customers.  In short, the Tenth Circuit held that Quill only protects out-of-state retailers with no physical presence from sales and use tax collection. 
 
After disposing of the DMA’s interstate commerce discrimination challenge, the Tenth Circuit rejected the DMA’s undue burden challenge.  The DMA relied solely on Quill in arguing that the Colorado customer notice and reporting requirements unduly burdened interstate commerce.  Since the court held that Quill is limited to sales and use tax collection, and a physical presence is not required before an out-of-state retailer can be subjected to non-tax regulatory requirements, the DMA’s undue burden challenge failed.      

BDO Insights
  • Prior to Brohl I and Brohl II, other states had proposed similar customer notice and reporting requirements to those enacted by Colorado.  The result in Brohl II could encourage other states to pursue similar legislation.
  • ​The Tenth Circuit’s view of Quill’s physical presence requirement as limited not just to tax collection, but also narrowly to collection of sales and use taxes, could embolden more states to assert economic presence nexus with respect to income taxes, gross receipts taxes, and other non-sales/use taxes. 
  • Likewise, in Brohl I, Justice Kennedy filed a concurring opinion in which he remarked that Quill’s physical presence requirement may have been surpassed by advancements in technology and Internet commerce and that “it is unwise to delay any longer a reconsideration of the Court’s holding in Quill.”  As a result, Brohl I and Brohl II could have far-reaching consequences beyond notice and reporting of consumer’s mail order and Internet purchases.  Just as the Tenth Circuit seemed persuaded by Justice Kennedy’s concurring opinion in Brohl I, these decisions could signal the end of a physical presence nexus requirement for all state taxes, with the exception of sales and use taxes.   

For more information, please contact one of the following regional practice leaders:
 

West:   Atlantic: Rocky Cummings
Tax Partner
    Jeremy Migliara
Tax Senior Director
  Paul McGovern
Tax Senior Director   Jonathan Liss
Tax Senior Director   Northeast:   Central: Janet Bernier 
Tax Partner
    Angela Acosta
Tax Senior Director
  Matthew Dyment
Tax Principal
    Nick Boegel
Tax Senior Director
 
Southeast:   Joe Carr
Tax Principal
  Ashley Morris
Tax Senior Director
    Mariano Sori
Tax Partner
  Scott Smith
Tax Senior Director   Richard Spengler
Tax Senior Director       Southwest:     Gene Heatly
Tax Senior Director
      Tom Smith
Tax Partner

Compensation & Benefits Alert - March 2016

Tue, 03/01/2016 - 12:00am
Retirement plan sponsors should not answer the compliance questions on the 2015 Forms 5500 and 5500-SF and related schedules
Summary The Internal Revenue Service instructs plan sponsors not to complete new compliance questions on 2015 Form 5500 and 5500-SF and Schedules H, I, and R.  
Discussion On December 7, 2015, the IRS published Form 5500 and Form 5500-SF, which included new compliance questions that were optional for 2015 but expected to be required for 2016.   On February 17, 2016, the IRS posted instructions on its website directing plan sponsors NOT to answer the compliance questions on the 2015 Forms 5500 and 5500-SF and related schedules H, I and R, because they were not approved by the Office of Management and Budget before the forms were published.  

This information was first made public in a Feb 16, 2016, message to software developers for the electronic system by which Forms 5500 are submitted, EFAST-2.  Revised versions of the 2015 instructions for both forms contain the new information regarding the optional questions. 

The revised instructions read as follows:

Form 5500 IRS Compliance Questions. 
New Lines 4o, 4p 6c, and 6d were added to Schedules H and I. The IRS has decided not to require plan sponsors to complete these questions for the 2015 plan year and plan sponsors should skip these questions when completing the form.

New Part VII (IRS Compliance Questions) was added to Schedule R for purposes of satisfying the reporting requirements of section 6058 of the Code. The IRS has decided not to require plan sponsors to complete these questions for the 2015 plan year and plan sponsors should skip these questions when completing the form.

Form 5500-SFIRS Compliance Questions. 
New Lines 10j, 14c, 14d, and new Part IX (IRS Compliance Questions) were added to this Form for purposes of satisfying the reporting requirements of section 6058 of the Code. The IRS has decided not to require plan sponsors to complete this question for the 2015 plan year and plan sponsors should skip this question when completing the form.


Although IRS instructs sponsors not to answer these compliance questions for on any 2015 annual report, IRS did issue on February 19, 2016, nine frequently asked questions to assist in clarifying the new compliance questions on the 2015 Form 5500-series returns: 
  • For the compliance question that asks how the 401(k) plan satisfies the nondiscrimination requirements for employee deferrals and employer matching contributions, which box should I select if the plan uses both the design-based safe harbor method and an ADP/ACP test?
  • For the compliance question that asks if the "current year testing method" for NHCEs is used in performing ADP/ACP testing for the plan year, which box should I select if the current year testing method is used for either the ADP or ACP test, and the prior year testing method is used for the other?
  • For the compliance question that asks how the plan satisfies the coverage requirements under section 410(b), how should I answer if the plan meets exceptions to the coverage rules?
  • For the compliance question that asks whether the plan trust incurred unrelated business taxable income, when would I choose the “N/A” checkbox?
  • For the compliance question that asks whether in-service distributions were made during the plan year, what types of in-service distributions should be reported?
  • Am I allowed to use the plan sponsor's EIN in place of getting a trust EIN to answer the question on trust information?
  • For the compliance question that asks whether a plan has been timely amended for all required tax law changes, how should I answer this question if the plan sponsor has used the IRS Employee Plans Compliance Resolution System (EPCRS) to correct the failure to amend the plan for required law changes by the applicable deadlines?
  • For the compliance question that asks for the date the last plan amendment/restatement for required tax law changes was adopted, which date should I enter for a plan that uses a pre-approved plan document and has adopted all required interim amendments but has not been restated for PPA by December 31, 2015?
  • A multiple-employer plan may file one Form 5500 to report information about the entire plan. Does the IRS require responses to the IRS compliance questions at the participating-employer level or at the plan level?
 
For questions related to matters discussed above, please contact one of the following practice leaders:
  Kim Flett
Sr. Director, National Tax
Compensation & Benefits

Penny Wagnon  
Sr. Director, National Tax
Compensation & Benefits

Linda Baker
Sr. Manager, National Tax
Compensation & Benefits

BDO World Wide Tax News - February 2016

Fri, 02/26/2016 - 12:00am
The first 2016 issue of the World Wide Tax Newsletter, published by BDO International, covers tax issues of international interest, including: e-commerce in Singapore, the Anti-Tax Avoidance Package, the implications of signing the Multilateral Competent Authority Agreement  (MCAA) by 31 countries, and more.
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International Tax Alert - February 2016

Fri, 02/26/2016 - 12:00am
USA Opens Door to Bilateral APAs with India 


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Summary On February 1, 2016, officials from the Internal Revenue Service (the “Service”) released Internal Revenue Bulletin, IR-2016-13,  announcing that beginning on February 16, 2016, the Advance Pricing and Mutual Agreement (“APMA”) office, a representative office of the United States competent authority, will begin accepting requests for bilateral advance pricing agreements (“bilateral APAs”) between the United States and India.  In recognition of the importance of United States – India relations, Service officials maintain that the acceptance of these requests is an important step forward in strengthening ties between the two governments in the taxation of multinational enterprises.
Background and Details

In a move to resolve the numerous transfer pricing cases in dispute, the Central Board of Direct Taxes introduced an APA program in 2012 to provide greater certainty to multinational enterprises doing business in India.  Initially, bilateral APAs between India and the United States were not accepted, and United States multinational enterprises with operations in India that sought certainty around United States - India transactions were limited to unilateral APAs.  The absence of bilateral APAs between the United States and India competent authorities stemmed from disagreements on transfer pricing issues surrounding markups for services, location savings and marketing intangibles, among others.  This lack of consensus on significant transfer pricing issues caused the backlog of competent authority cases to continue to build up without resolution.  

Progress between the two countries in resolving these cases steadily increased over the years. In January 2015, the United States and Indian competent authorities jointly announced that they had developed a framework for resolving disputes involving the performance of information technology-enabled services or software development services by Indian-resident affiliates.  In response to the development of this framework, APMA began accepting requests for pre-filing conferences, generally the first stage of the APA process, for bilateral APAs between the United States and India in March 2015.

Beginning this month, both competent authorities are now ready to accept requests for bilateral APAs covering transactions involving information technology-enabled services, software development services, or other issues in which transfer pricing principles are relevant.   The acceptance of these requests will provide multinational enterprises doing business in these two countries with certainty around the transfer pricing methods used, appropriate adjustments and other critical assumptions. 


BDO Insights

The acceptance of bilateral APA requests between the United States and Indian tax authorities is a significant positive step towards providing greater certainty on historically contentious transfer pricing issues. The APA process can be costly and time-consuming; however, in certain situations, it presents an attractive alternative to audit appeals or litigation. Specifically, taxpayers need to consider the magnitude of their intercompany transactions in India; the impact of their Indian transfer pricing policy on other financial metrics such as cash flows; and the costs of double taxation and appeal/litigation in the event of a transfer pricing audit. Depending on the amounts involved and the other tax or financial goals of the company, the current and future benefits of an APA might justify the cost and effort spent in obtaining it.


How BDO Can Help

BDO USA, LLP can assist in determining whether a bilateral APA is the appropriate mechanism to address your particular transfer pricing and tax risks.  Our professionals, through our U.S./India Tax Desk, have extensive experience guiding our clients through the APA process and in helping clients navigate through complex tax and transfer pricing issues arising in India. 
 


For more information, please contact one of the following practice leaders:
 

Robert Pedersen
International Tax Practice Leader

 

William F. Roth III
Partner

 

Bob Brown
Partner

 

Jerry Seade
Principal

  Scott Hendon
Partner  

Joe Calianno
Partner and International Technical
Tax Practice Leader

  Monika Loving
Partner  

Michiko Hamada
Senior Director

  Brad Rode
Partner   Chip Morgan
Partner

Unclaimed Property Alert - February 2016

Mon, 02/22/2016 - 12:00am
Delaware SOS VDA Program Invitation and Audit Notice – More Letters Sent 2/19/16  Download PDF Version 
Summary

Delaware reached out to approximately 200 companies around 9/15/15 and has sent an additional 200 letters out on 2/19/16 informing holders to participate in the VDA program based on record of non-compliance or face being audited by the Department of Finance. Companies that do not act within 60 days are expected to receive audit letters thereafter. Again, the first wave of letters were sent out around 9/15/15 and second wave of letters were sent 2/19/16. Additionally, Delaware send various audit notices on 12/15/15. Targeted companies now include middle market companies that maintain annual revenues of $100M and above. See Sample Reach Out Letter.

Details

What to Do

Given the above, companies that receive this notice should:
  1. Determine if your organization has received prior Delaware correspondence;
  2. Determine what historical compliance, if any, has been with the state of
  3. Delaware - (1986 to current);
  4. Determine record retention policy for banking records, A/R records, general ledgers, etc.
  5. Determine if policy and procedures exist around unclaimed property (current and historical);
  6. Evaluate the VDA Decision Tree; and
  7. Take action immediately where appropriate.
Even if an organization has not received a notice, the above steps are best practices for addressing escheatment matters and provide for reduced look-back periods for those entering sooner rather than later. Moreover, some companies, especially decentralized organizations, may have received a letter but it was never routed to the appropriate department, which without following the steps above may lead to an audit. For those that have received audit letters, please contact BDO at your earliest convenience for best practices and steps you can take to mitigate additional state exposure if timely addressed.

Companies at Highest Risk
  1. Incorporated in the state of Delaware, or
  2. Located in other states with significant operations in Delaware who have not addressed or underreported their unclaimed property with the state.
BDO Insights BDO has significant experience with Delaware Secretary of State VDA Program. BDO has successfully assisted many clients in Delaware VDA program. Our success is largely attributable to BDO preapproved review process and our relationships, and experience working with Delaware. Similarly, we have represented numerous of clients in unclaimed property audits with success. Please feel free to reach out to us with any questions, request for additional information, etc. We would be happy to address these for you while sharing best practices.
 

BDO’s National Unclaimed Property Practice has handled hundreds of Delaware Voluntary Disclosures and audit related matters for clients and can assist you. Should you have any questions or would like to discuss escheatment, please contact: Joseph Carr, Partner & National Unclaimed Property Practice Leader (312) 616-3946  / jcarr@bdo.com.

International Tax Alert - February 2016

Thu, 02/18/2016 - 12:00am
The United Kingdom Government Has Introduced Legislation That Provides For Devolution of Corporation Tax Rate Setting Powers to the Northern Ireland Assembly (“NIA”) For Certain Trading Profits Arising In Northern Ireland
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Summary The Corporation Tax (Northern Ireland) Act 2015 became law in the United Kingdom in March 2015, and, in November 2015, the Northern Ireland executive and UK and Irish governments agreed a set of actions that should, among other things, facilitate the implementation of a corporation tax rate reduction in Northern Ireland. 

The law provides that the NIA may, by way of resolution, set a rate of corporation tax on certain profits arising in Northern Ireland that is different from the main rate of corporation tax in the United Kingdom (currently 20 percent).  The expectation is that the rate of corporation tax that will apply
to profits arising in Northern Ireland will be reduced to 12.5 percent. This is the same as the current rate of corporation tax in the neighboring Republic of Ireland.    
Background and Details The United Kingdom Government is committed to creating the most competitive tax system in the G20 to both stimulate UK growth and encourage foreign direct investment.  Recognizing that the Northern Ireland economy has been over-dependent on the public sector in the past and that it cannot compete effectively with the low tax jurisdiction across the land border of Ireland, it is anticipated that the lowering of the corporate tax rate will stimulate growth, lead to job creation, and increase private-sector investment in the country.  

The Corporation Tax (Northern Ireland) Act 2015 empowers the NIA to set a corporation tax rate by way of resolution. The power to set the rate is only exercisable once the commencement financial year has been appointed by the UK Government by way of statutory instrument.  To date, no such commencement order has been made.  While the legislation provides that the rate set could be as low as zero percent, it is expected that a rate of 12.5 percent will be implemented effective from April 1, 2018.

Once in force, the Northern Ireland tax rate will apply to certain trading profits arising in Northern Ireland.  There are separate regimes for Small and Medium-sized Enterprises (“SMEs”) and for large companies which are discussed in more detail below
 
SME regime

SMEs (i.e., those companies belonging to groups with less than 250 employees, and with either less than €50m turnover or €43m balance sheet total) that have employees in Northern Ireland will qualify for the reduced rate of corporation tax on all of their qualifying UK profits on the basis of an “in/out” test.  If at least 75 percent of both working time and workforce expenses of company employees in the United Kingdom relate to time those employees spend in Northern Ireland, then 100 percent of the qualifying profits of the company will benefit from the Northern Ireland corporation tax rate.  If the 75-percent test is not met, then none of the profits will qualify for the reduced rate.
 
Large company regime

Large companies are required to determine whether they have a Northern Ireland Regional Establishment (“NIRE”), i.e., a permanent establishment in Northern Ireland.  If so, then the qualifying profits attributable to that NIRE will benefit from the reduced rate.  The tests for determining whether a company has a NIRE and if so how profits are allocated broadly follow the UK rules for permanent establishments.  Only profits arising from genuine activities in Northern Ireland will therefore qualify for the 12.5-percent rate.
 
Qualifying profits

Only trading profits can benefit from the reduced rate in Northern Ireland, and certain trades and activities are excluded. 

Excluded trades are:
  • Ring-fence oil & gas activities
  • Lending and investing activities
  • Investment management
  • Long-term insurance business
  • Re-insurance business 

Profits arising from back office functions of the excluded trades listed above, with the exception of oil & gas and re-insurance business, can also qualify for the Northern Ireland rate by election.  In quantifying the profit arising from those qualifying back office functions, the statute provides for cost plus five percent.

  BDO Insights The United Kingdom has successfully implemented corporate tax reform to encourage inbound investment, stimulate growth, and create jobs.  However, at 20 percent (reducing to 18 percent by April 1, 2020), the corporation tax rate in Northern Ireland cannot compete with 12.5 percent in Dublin across the border.  The proposed rate reduction for Northern Ireland should level the playing field, and United States multinational companies looking to invest in the United Kingdom might therefore consider whether Belfast, rather than elsewhere in the United Kingdom,  is a viable location for their business.
For more information, please contact one of the following practice leaders:
 

Robert Pedersen
International Tax Practice Leader

 

William F. Roth III
Partner

 

Bob Brown
Partner

 

Jerry Seade
Principal

  Scott Hendon
Partner  

Joe Calianno
Partner and International Technical
Tax Practice Leader

  Monika Loving
Partner  

Ingrid Gardner
Managing Director UK/US Tax Desk

  Brad Rode
Partner   Chip Morgan
Partner

R&D Tax Alert - February 2016

Tue, 02/16/2016 - 12:00am
Florida R&D Credit Changes - Action Now Required by March 1, 2016
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On February 5, 2016, the Florida Department of Revenue issued a tax information publication1 (TIP) outlining changes to the Florida Corporate Income/Franchise Tax Research and Development Tax Credit.
Summary Taxpayers performing certain development activities in Florida have new reasons to apply for the credit in 2016. 

Florida’s R&D tax credit has been available since 2013, but it has discouraged taxpayers with its atypical application process and relatively low $9 million cap. Beginning this year, however, Florida has increased the cap by more than 150% and made several improvements to both the application process and the allocation of credits. Taxpayers need to be aware of the new deadlines and requirements.
Details In the first three years of Florida’s R&D credit program, taxpayers applied on a first-come, first-served basis beginning at 8:00 a.m. ET on March 20 of the applicable year. In the 2013 application year, all $9 million in credits were allocated in just over six hours; and for the 2015 application year the credits were allocated within six minutes, with only 21 taxpayers, out of 80 eligible applications, receiving any credits. For 2014, 45 applications were denied, because they were received after the $9 million cap was reached.

Significant changes regarding the 2016 application year give taxpayers a new incentive to apply for the credit, but important considerations and deadlines must be met:
 
  1. By March 1, 2016, taxpayers who intend to apply for the credit must request a certification letter from the Department of Economic Opportunity certifying that the taxpayer is an eligible target industry business. “Qualified target industry businesses” means businesses in the manufacturing, life sciences, information technology, aviation and aerospace, homeland security and defense, cloud information technology, marine sciences, and nanotechnology industries.
  2. The application period has been changed from a first-come, first-served period, which for 2015 amounted to just over six hours—to a period of seven days, from March 20 to March 26 of the application year (for qualified expenses incurred the previous calendar year).
  3. The combined total credit cap has increased from $9 million to $23 million. However, the maximum amount of credits that may be granted to any one taxpayer is $9 million.
  4. If the total amount of credits for all applicants exceeds the $23 million cap, the credits will then be be allocated on a prorated basis.
Note that the availability of the credit is contingent on the Florida Legislature's adoption of the federal Internal Revenue Code (IRC) that includes the now permanent federal R&D credit. Legislation was last passed in May 2015 to retroactively conform to the IRC, and proposed legislation to further extend the period of IRC conformity is pending action by the Florida Senate Committee on Finance and Tax.
BDO Insights With the credit’s extended application period and significant increase in the overall cap, taxpayers performing development activities in qualified industries in Florida should consider their eligibility for the credit and make sure to meet the March deadlines noted above.
 
For more information, please contact one of the following practice leaders:
 

Chris Bard 
National Leader 

 

Jonathan Forman
Principal

 

Jim Feeser
Senior Director

 

Hoon Lee
Partner

  Chad Paul
Senior Director   

Patrick Wallace
Senior Director 

  David Wong Principal   

 


http://dor.myflorida.com/dor/tips/tip16c01-01.html

International Tax Alert - February 2016

Fri, 02/12/2016 - 12:00am
Post-Base Erosion and Profit Shifting (“BEPS”) Treaties Signed By Germany In 2015  
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Summary Germany has signed new income tax treaties with Australia on November 12, 2015 (“Germany-Australia Treaty”) and with Japan on December 17, 2015 (“Germany-Japan Treaty”) (together “Post-BEPS Treaties”). The Post-BEPS Treaties lower or eliminate withholding tax rates on cross-border transactions and incorporate the provisions in the Organisation for Economic Co-operation and Development (“OECD”) Model Convention as well as the OECD/G20 BEPS recommendations. The Germany-Australia Treaty replaces a previous tax treaty between Germany and Australia signed in 1972 while the Germany-Japan Treaty replaces a previous tax treaty signed in 1966. These Post-BEPS Treaties will enter into force once ratified.  
Background and Details Major changes in the Post-BEPS Treaties

These Post-BEPS Treaties represent the first post-BEPS treaties between major economies that incorporate the main OECD recommended treaty changes. These changes include (but are not limited to): prevention of treaty abuse, dual residency rules and hybrid mismatch arrangements, discussed in more detail below.
 
Prevention of Treaty Abuse
In accordance with BEPS Action Item 6: Prevent Treaty Abuse, the preambles of the Post-BEPS Treaties clarify that their express purpose is to eliminate double taxation in the case of taxes on income and capital without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance. The benefits of the Post-BEPS Treaties will be denied to those deemed to abuse its provisions. This is consistent with the principal purpose test provided for under BEPS Action Item 6, which denies treaty benefits where the principal purpose of the transaction is to take advantage of Post-BEPS Treaties.

Nothing in the Post-BEPS Treaties will prevent either country from applying their domestic laws which are designed to prevent the evasion or avoidance of taxes.
 
Dual Residency Rules
The residency article of the Post-BEPS Treaties contains a new provision dealing with dual residency situations, including a tie-breaker rule that reflects BEPS Action Item 6 recommendations. In cases where a person, other than an individual, is a dual resident, the competent authorities of the Contracting States shall determine, by mutual agreement, the Contracting State of which the person shall be deemed to be a resident. This determination will take into consideration the place of management or head office, place of incorporation and any other relevant factors. In the absence of such agreement, a dual resident will not be entitled to the benefits of the Post-BEPS Treaties.
 
Hybrid Mismatch Arrangements
In line with the BEPS Action Item 2: Neutralize the Effects of Hybrid Mismatch Arrangements,  Post-BEPS Treaty benefits will be available for income derived through fiscally transparent entities but only to the extent that the income is treated as the income of a resident of Japan, Australia, or Germany, respectively, under domestic law.
Some other notable changes to the Post-BEPS Treaties include:
  • A ten year time limit will generally apply for making transfer pricing adjustments, subject to certain exceptions for negligence or willful or fraudulent conduct.
  • The possibility for taxpayers to seek the revenue agencies’ assistance in the resolution of tax disputes arising from the application of the Post-BEPS Treaties under mutual agreement procedures. Taxpayers will also have the ability to refer tax disputes that remain unresolved after two years to an independent binding arbitration.
  • The broadening of the rule for exchange of taxpayer information. 

Specific changes to the Germany-Australia Treaty Permanent Establishment
Article 5 of the Germany-Australia Treaty includes the main BEPS Action Item 7: Preventing the Artificial Avoidance of Permanent Establishment Status, recommendation. The definition of “permanent establishment” has been expanded and supplemented by new provisions which will broaden the range of circumstances in which both countries can tax business profits. Article 5 has notably been updated to include proposed OECD amendments with regards to the substantial negotiation of contracts and the definition of independent agents. In accordance with the OECD recommendations, the Germany-Australia Treaty narrows the preparatory or auxiliary activity exception.
 
Withholding Tax Rates
Under the Germany-Australia Treaty, dividends may be taxed in the source country of the dividend subject to the
following limitations:
  • Zero percent for intercorporate dividends paid to publicly-listed companies or their subsidiaries, or unlisted companies in certain circumstances, that hold 80 percent or more of the voting stock of the paying company;
  • Five percent of the gross amount of the dividend for intercorporate dividends paid to companies that hold at least ten percent of the paying company’s voting stock for at least 6 months;
  • 15 percent for all other dividends.

The Germany-Australia Treaty provides for a Ten-percent withholding tax rate for interest, with an exemption for interest derived by government bodies, central banks and unrelated financial institutions.

The withholding tax rate for royalties will be five percent.
 
Specific changes in the Germany-Japan Treaty

Treaty Abuse and Permanent Establishment
Consistent with BEPs Action Item 6 recommendations and in addition to the principal purpose test, the Germany-Japan Treaty includes objective tests that would determine whether a person should be considered as a qualified person by satisfying certain conditions. If such conditions are met, they would be entitled to the benefits of the Germany-Japan Treaty.

A new approach to calculate income attributable to permanent establishment has been introduced in the Germany-Japan Treaty. These provisions of the Germany-Japan Treaty are consistent with Article 7 of the OECD Model Convention.

In addition, a “switch-over” clause has been introduced, which allows Germany to apply the tax credit method to cases where Germany exempts income received by a German resident if there is a treaty qualification conflict.
 
Withholding Tax Rates
Under the Germany-Japan Treaty, dividends may be taxed in the source country of the dividend, subject to the
following limitations:
  • Zero percent where the corporate shareholder holds at least 25% of the voting stock of the paying company for at least 18 months;
  • Five percent where the corporate shareholder holds at least 10% of the voting stock of the paying company for at least six months;
  • 15 percent in all other cases.

The Germany-Japan Treaty provides for a withholding tax exemption for interest and royalty payments.
BDO Insights The Post-BEPS Treaties will enter into force after the contracting countries have completed their domestic requirements and instruments of ratifications have been exchanged.

Multi-National Companies and Investors that rely upon the Germany-Australia or Germany-Japan Treaty should review their existing structures and ensure that important benefits may still be available under the Post-BEPs Treaties provisions, or even new benefits could be claimed. Envisioned structures and future transactions will need to be analyzed with the Post-BEPS Treaties in mind. 

BDO international tax specialists can advise of these matters and help to find the most efficient structures.
 
For more information, please contact one of the following practice leaders:
 

Robert Pedersen
International Tax Practice Leader

 

William F. Roth III
Partner

 

Bob Brown
Partner

 

Jerry Seade
Principal

  Scott Hendon
Partner  

Joe Calianno
Partner and International Technical
Tax Practice Leader

  Monika Loving
Partner  

Martin Karges
Senior Director, Germany Desk

  Brad Rode
Partner   Chip Morgan
Partner

State and Local Tax Alert - February 2016

Fri, 02/12/2016 - 12:00am
The Supreme Court of California Denies Review of The Court of Appeal’s Decision in Lucent Technologies and Opens the Door to Refund Opportunities for Similarly Situated Taxpayers
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Summary  On January 20, 2016, the Supreme Court of California denied review of the Court of Appeal of California, Second Appellate District’s October 8, 2015, decision in Lucent Technologies, Inc. v. State Board of Equalization, Docket No. B257808, which renders that decision final and paves the way for the taxpayer’s refund.  In Lucent Technologies, the California Appellate Court held that an assessment of nearly $25 million in sales taxes in connection with a sale of software transferred via magnetic tapes and discs under the terms of a technology transfer agreement (or “TTA”) was erroneous.  See the BDO SALT alert that discusses the Appellate Court decision. 
  Details In Lucent Technologies, the California Court of Appeal issued its decision on October 8, 2016, in which it held that: (i) computer software used by computers to operate telecommunication switches that was transferred to the customer via magnetic discs and tapes was not tangible personal property; and (ii) the underlying software contracts qualified as nontaxable TTAs.  On November 18, 2015, the State Board of Equalization filed a petition with the Supreme Court of California seeking review of the appellate court’s decision, which California’s highest court denied on January 20, 2016.  See Supreme Court of California Docket No. S230657.  With no apparent federal question or other issue within the Supreme Court of the United States’s review jurisdiction, the California high court’s denial of the State Board of Equalization’s petition for review renders the lower court’s decision in favor of the taxpayer final, and the taxpayer’s right to a nearly $25 million refund sealed.
  Insights
  • As a result of the Supreme Court of California’s denial of the petition for review, the State Board of Equalization will need to review and process thousands of refund claims that had been held in abeyance pending the final outcome in Lucent Technologies. 
  • Retailers that have paid sales tax under an arrangement similar to that of the taxpayer in Lucent Technologies should consider whether to seek a refund, and those retailers that are collecting tax under such an arrangement should consider whether to continue to collect tax.
 

For more information, please contact one of the following regional practice leaders:
 

West:   Atlantic: Rocky Cummings
Tax Partner
    Jeremy Migliara
Tax Senior Director
  Paul McGovern
Tax Senior Director   Jonathan Liss
Tax Senior Director   Northeast:   Central: Janet Bernier 
Tax Partner
    Angela Acosta
Tax Senior Director
  Matthew Dyment
Tax Principal
    Nick Boegel
Tax Senior Director
 
Southeast:   Joe Carr
Tax Principal
  Ashley Morris
Tax Senior Director
    Mariano Sori
Tax Partner
  Scott Smith
Tax Senior Director   Richard Spengler
Tax Senior Director       Southwest:     Gene Heatly
Tax Senior Director
      Tom Smith
Tax Partner

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